ANUx Introduction to Actuarial Science

Final Exam
Introduction
The aim of this final exam is to present you with a coherent collection of questions from across the
course. As such, the questions will all form part of a scenario that involves the modelling of a life
insurance company. Questions will expand the scenario until all aspects of the course are being
considered. Paragraphs between the questions will also assist in expanding the scenario.
You are welcome to solve the questions by hand (where possible) or by using a spreadsheet tool.
Some questions will require the use of a spreadsheet tool. Where the question requires simulation,
you are required to use one of the simulation files from Lesson 6 or 7 as a starting point, and in
particular you must use the same random numbers as are in those files. DO NOT GENERATE ANY
NEW RANDOM NUMBERS. This process is the same as that outlined in Lessons 6 and 7.

The exam
An insurance company is considering the introduction of an investment-only product that provides a
claim based on the accumulated value of premiums paid by a policyholder. Policyholders would pay
annual premiums of X at Year 0, 1, 2, , n 1 and would receive a claim equal to the accumulated
value of the premium payments at Year n . Unless told otherwise, for the following questions use an
interest rate of 4% per annum and assume that n 25 . Assume also that, for the moment, and
until told otherwise, policyholders do not die during the 25 year policy period.

Final Exam Question 1

Calculate the present value, at Year 0, of a single premium payment of $5,000 made at Year 12.

Final Exam Question 2

Calculate the accumulated value, at the time that the claim is paid, of all of the premium payments
of $5,000.

Final Exam Question 3

A policyholder is wishing to receive a claim payment of $300,000. Calculate the value of the
premium payment X , that will provide this claim payment.

Adam Butt
Version 1 (2015)

Page 1

ANUx Introduction to Actuarial Science Final Exam

Final Exam Question 4

All other things remaining equal, what impact would a value of n 30 instead of n 25 have on
the calculated value of X in Final Exam Question 3 for a claim payment of $300,000?
A) X is higher when n 30 compared to n 25
B) X is the unchanged when n 30 compared to n
C) X is lower when n 30 compared to n 25

25

Final Exam Question 5

Now assume that the interest rate each year follows a normal distribution with a mean of 4% and
a standard deviation of 5%. For premium payments of $5,000, calculate the probability that the
claim payment for an individual policyholder will be greater than $250,000.
Hint you will need to run simulations to answer this question, although the mortality component of
the Lesson material will not be relevant. You should calculate the claim payment for each simulation
on an iterative basis (i.e. building up year by year to Year 25) using the random interest rates.

The insurance company is now going to add an insurance element to the policy described above and
hence will need to decide what mortality assumptions they are going to use before performing any
further projections. They have decided that it is appropriate to use a transition intensity of mortality
structure of

e x.

Final Exam Question 6

It has been observed in a population that the probability of a 30 year old surviving until age 55 is
equal to 0.94, and the probability of a 30 year old surviving until age 90 is equal to 0.30. Assuming
the above transition intensity of mortality structure and that
0.09 , calculate and .

Assume for all remaining final exam questions that, unless told otherwise, mortality rates follow
the transition intensity structure calculated in Final Exam Question 6, including the values of ,
and .

Final Exam Question 7

All other things remaining equal, what impact would a value of
0.10 instead of
on the probability that an individual will survive from age 0 to age 30?
A) The probability of survival is higher when
0.10 compared to
0.09
B) The probability of survival is unchanged when
0.10 compared to
0.09
C) The probability of survival is lower when
0.10 compared to
0.09

Adam Butt
Version 1 (2015)

Page 2

0.09 have

ANUx Introduction to Actuarial Science Final Exam

A life table, based on the transition intensity of mortality structure calculated in Final Exam Question
6, is available for download in the relevant Courseware of the edX version of the course. This life
table can be used for all remaining final exam questions, unless told otherwise.

Final Exam Question 8

Calculate the probability that an individual will survive from age 40 to age 65.

Final Exam Question 9

Calculate the probability that an individual, currently alive at age 40, will die during the year aged 55.

The insurance company has now decided on the product structure it wants for its policy. The
structure is as follows:

Whilst alive, policyholders pay annual premiums of X at Year 0, 1, 2, , n 1 .

If the policyholder dies, the policyholders dependent(s) receive a claim at the end of the
year of death equal to a return of aggregate premium payments without interest.
Upon survival until Year n , policyholders receive a claim C at Year n .

Unless told otherwise, for the remaining final exam questions assume that interest rates each year
on Actual Reserves follow a normal distribution with a mean of 4% and a standard deviation of
5%, and that C
40 at Year 0.

$300, 000 and n

25 . The product is sold to 10,000 policyholders aged exactly

Final Exam Question 10

Calculate the expected present value (EPV) of the claims for an individual policyholder for the above
policy as a function of X . Assume an interest rate for the calculation of reserves of 4% per annum.

Final Exam Question 11

Calculate the value of the premium X to be charged to ensure that the EPV of claims (from Final
Exam Question 10) is equal to the EPV of premiums.

Final Exam Question 12

Calculate the probability that an annual premium of $7,500 will be sufficient to cover all future
claims cash flows.

Adam Butt
Version 1 (2015)

Page 3

ANUx Introduction to Actuarial Science Final Exam

Final Exam Question 13

All other things remaining equal, what impact would a value of
5% instead of
4% have on
the probability that the annual premium of $7,500 will be sufficient to cover all future claims cash
flows, as calculated in Final Exam Question 12?
A) The probability of sufficiency is higher when
5% compared to
4%
B) The probability of sufficiency is unchanged when
5% compared to
4%
C) The probability of sufficiency is lower when
5% compared to
4%

Final Exam Question 14

Calculate the annual premium to be charged to give a 95% probability of being sufficient to cover all
future claims cash flows.

Final Exam Question 15

For an annual premium of $7,500, calculate the Expected Reserves at Year 20 (after the payment of
the premium at Year 20) for a single alive policyholder who purchased this policy at age 40. Assume
a fixed interest rate on reserves of 4% per annum.

Final Exam Question 16

The insurer now wishes to take money from the Actual Reserves whenever the Actual Reserves
exceeded the Expected Reserves by more than 20%. From Year 5 up until and including Year t of
the policy, the insurer will take away any money in the Actual Reserves that is greater than 1.2 x
Expected Reserves, except where the Expected Reserves are negative, in which case the Actual
Reserves are set to zero.
For an annual premium of $7,500, calculate the value of t such that the probability the premium will
be sufficient to cover the claims cash flows is 55%. Note that t should be an integer.

Adam Butt
Version 1 (2015)

Page 4